6. Currency Pairs
Buying the currency pair implies buying the first, base currency, and selling short an equivalent amount of the second, quote currency to pay for the base currency. The trader doesn’t need to own the quote currency before selling, as it is sold short. A speculator buys a currency pair, if she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up. Selling the currency pair implies selling the first, base currency short, and buying the second, quote currency.
A speculator sells a currency pair if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency. After buying a currency pair, the trader will have an open position in the currency pair. Right after such a transaction, the value of the position will be close to zero, because the value of the base currency is more or less equal to the value of the equivalent amount of the quote currency. The value will be slightly negative, because of the spread involved.